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HYG: Now Is Not The Time To Invest In This High Yield ETF

Published Mon, 20 May 2019 12:43:59 -0400 on Seeking Alpha

Investment Thesis
iShares High Yield Corporate Bond ETF (HYG) focuses on corporate bonds that have ratings below investment grades. The ETF tracks the Markit iBoxx USD Liquid High Yield Index. HYG provides exposure to a broad range of U.S. high yield corporate bonds. In addition, it provides a vehicle for investors seeking higher income. However, high yield corporate bonds such as HYG may perform poorly in an economic recession as default rates will almost certainly spike. Since we are in the latter stage of the current economic cycle, we think investors may want to wait till the beginning of the cycle to invest.
Data by YCharts
Fund Analysis
High credit risk
High yield corporate bonds are below investment grades bonds. These bonds tend to be riskier than investment grade bonds and are much more vulnerable in an economic recession. As can be seen from the chart below, high-yield bond default rate has spiked following the past two recessions in the United States (yellow solid line). In the last recession, the default rate spiked to nearly 15%.

Source: Moody’s Capital Markets Research
Although HYG may be in a better position than other similar high yield bond ETFs as half of its bonds in the portfolio are BB rated bonds, about 10% of its bonds are CCC rated bonds. For reader’s information, CCC or lower rated bonds have much higher average default rates of 5.9% in the past 20 years than the 1.3% average default rate of BB rated bonds.

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